UK Pensions (QROPS, QNUPS & EFRBS)

Any person holding a United Kingdom (UK) pension may be motivated to move it elsewhere due to a number of problems with leaving it in the UK (which are outlined below). The exodus of pensions out of the UK has meant that a great deal of untaxed wealth is effectively disappearing from the sights of the UK tax authorities to countries with low or no tax which may (after five years reporting period have elapsed) essentially do whatever they wish with the funds including the loaning or distribution of capital to the beneficiary during his life. This freedom has also encouraged the development of creative pensions schemes in the UK intended for later departure from the UK. This loss in tax revenue has triggered a number of anti-avoidance rules which have themselves given rise to new pension products designed to comply whilst still allowing the removal of capital from the UK. This is an area which is likely to change in the future as more and more schemes and countries (especially non-EU countries) will come under scrutiny from the UK.

Problems with UK Pensions Compulsory Annuity Purchase The main problem with UK pensions is the compulsory purchase of an annuity at or before age 75 effectively crystallising the pension value at an arbitrary point which apart from removing the benefit of the investment may also (if it comes at a time when the markets are faring badly) greatly diminish the potential value of the pension. On-Going Tax Liability UK pensions will be taxed in the UK as they are drawn. Restriction on Usage of Pension Fund UK pensions can only be used in accordance with onerous local requirements preventing or limiting advances or loans from the fund to the beneficiary. Also the beneficiary will not have any discretion over what the pension is invested into. Problems on Death On death the pension may not be transferrable to another person or may attract taxation.

Overuse of Tax Avoidance

All of the above problems can be overcome by moving the pension out of the UK. There have, however, been a large number of scheme operators who whilst paying lip service to HMRC rules and guidelines were set up with the intention of either 1) immediately transferring the untaxed pension wealth to the beneficiary once the reporting period had elapsed; or, 2) to retain control of the pension fund invest it at the direction of the client including the making of investments or loans to companies under the client’s control. Whilst these schemes may have followed the letter of the law they are clearly operating contrary to the spirit of the HMRC rules. Tax benefits granted to pension savers come from a public policy desire to encourage long term savings for the benefit of the saver on retirement and are made on the consideration of the UK receiving income from the pension at a later date when it is drawn. These aims are entirely defeated if the pension can be moved away from the UK to another country with less strict rules. Due to the above considerations and the current atmosphere in the UK regarding tax avoidance and the number of recent attacks on certain providers and countries (especially non-EU countries) this is an area which is likely to come under increased review.

QROPS/QNUPS and EFRBS The three main products are outlined below: QROPS Qualified Recognised Overseas Pension Scheme (QROPS) are schemes operated in foreign countries which have obtained HMRC approval to take receipt of UK pension funds. QROPS were the main means of overseas transfer of pensions until 2010 where QNUPS became available. QROPS’ advantages include the freedom from the requirement to purchase an annuity, a much greater degree of freedom in the making of advances of loans to the beneficiary and of choice of investments than is permissible under UK law (once the five year reporting period has elapsed). They may also mean that the beneficiary can draw the pension free from income tax (depending on their residence) but may not be effective for inheritance planning. QNUPS Qualified Non-UK Pension Schemes (QNUPS) are a recent development (2010) and have the benefits of a QROPS combined with added inheritance tax benefits. EFRBS Employer Financed Retirement Benefit Schemes (EFRBS) are a scheme contributed to by employers only and are intended for UK corporations to reward high-earners. They are also used as an aggressive tax planning product offering loans of funds back to the employer in an attempt to avoid UK income tax but are likely to soon come under attack in this regard.

Choice of Country

Many countries operating QROPS have been effectively shut down and the remaining countries need to be assessed with a view to their tax advantages (this is a decision which must be made based upon not just UK tax rules but also the tax rules in the country which the pension beneficiary will relocate to). Aside from the tax advantages the likelihood of the scheme itself or the country where it is operated coming under attack from the UK needs to be considered. Some commentators feel that no country is immune whilst others argue the benefits of EU member states are being less likely to come under attack than non-EU countries.